Commodity markets lost more than $16 billion in value during last week’s selloff, Reuters reported in a special report. Equity and commodity markets plunged as growing anxiety over the global economic outlook spurred a flight to safe-haven bonds. The drop in prices wiped out $16 billion in value, mainly due to oil prices dropping 6 percent and investors losing $7.3 billion on paper, the report said.
The rout was caused by S&P’s downgrading of the US’ “AAA” rating and panic over the unsustainable rise in Euro-zone debt spreads potentially pushing the region into a breakup of the Euro or a massive transfer of debts onto German and French taxpayers — a move that would consign the core countries to years of slow growth.
The “But Is China Still Growing?” Test
Those were the catalysts, but in and of themselves the markets, many may have concluded, were manageable so long as China continued to grow robustly. Metal market fundamentals remain reasonably sound provided Chinese growth remains sound. So much of the world’s metals demand is predicated on China’s continued growth that data released last week showing consumer price inflation hugging three-year highs was enough to put further downward pressure on prices. Analysts fear inflation will curb Beijing’s ability to stimulate demand to offset a global downturn, as they did in the low inflation environment of 2009-10.
“Now is not the time to talk about inflation,” said Dong Xian’an, chief economist at Peking First Advisory quoted by Reuters. “China must be on serious watch for policy over-tightening under the current global circumstances.”
Rio Chief Economist Vivek Tulpule is quoted as saying volatility will be an ongoing feature of the metals markets not just in coming months, but years. In fact it bears repeating: “We expect that real long-run prices and margins for almost all minerals and metals will average significantly higher going forward than in the decade preceding the most recent six-year boom, but price volatility is also expected to be elevated — a pattern we have dubbed as the ‘saw tooth economy’.”
So while saying the ongoing fundamentals remain firm, the miner did not say they expected prices to be significantly higher for a prolonged period the “stronger for longer mantra only that Rio expected prices to average higher than in the decade prior to the recent six-year boom. Well, yes, that period was substantially below current levels; no one is seriously suggesting copper will fall back below $2,000 per ton, or aluminum to below $1,500 per ton.
South of the (US) Border
Meanwhile, Mexico, for one, is not expecting an imminent return to high oil prices. They are reported to have hedged their 2012 oil production, starting by spending $800 million to hedge 222 million barrels of its 2011 oil output with options. At the same time, JP Morgan is taking an equally pessimistic line, predicting gold will reach $2,500 an ounce by the year-end, a level only conceivable on the back of widespread fear of debt woes and inflation.
As the ongoing shenanigans in Washington and the almost unsolvable (politically, at least) debt worries in Europe play themselves out, keep a close watch on where the real metals demand has been coming from: China. If inflation does not peak very soon and begin to fall, the world’s largest metals consumer could be driven to over-tighten credit and growth to the point where metals prices have nowhere to go but further down.